Tuesday, June 25, 2019

UK agriculture and the current political landscape

My presentation to the Geo-Agriculture conference in Beverley this week discussed the political landscape as it related to agriculture. I got it wrong in the preceding year when I forecast an eleventh hour fudged compromise given that EU decision-making was characterised by last minute deals. This would have left many issues unresolved that would have to be addressed during the transition or implementation period, but during that period economic relationships would continue much as before.

Why did I make a false prediction?:

  • An exit decision for a member state could not be fudged like a CAP reform
  • The member states showed more solidarity than I had anticipated
  • MPs were more intransigent than I had thought likely

The Agriculture Bill has been the victim of Brexit chaos. It finished its progress through committee in November 2018 and continues to wait for its Report Stage debate to be scheduled, now over 200 days since it was debated The NFU would like to see more emphasis on food production and food security, help for farmers to better manage risk and periods of poor market returns.

It is important to bear in mind that farm businesses vary considerably and this affects their ability to respond to Brexit. Some of the variations include climate/terrain; soil type; ownership structure: owned, tenanted, mixed (increasingly common).

Resilience enables farmers to withstand unexpected shocks and changing conditions. Farmers are being urged to unite, build resilience and look after one another, but there is a limited record of cooperation in the UK. It can lead to an emphasis on survival rather than adjustment and adaptation.

Farms are reliant on EU subsidies

16 per cent of farm business make a loss, but that is forecast to increase to 42 per cent as basic payments are phased out. Direct payments account for 61 per cent of farm net profits. An accountant who represents 100 agricultural businesses in the Highlands estimates just one would be profitable without subsidy. Average Highland estate receives two-thirds of its income from EU subsidies.

Some farms and sectors are more challenging than others, but enterprises can be well managed in difficult conditions. AHDB/Andersons study found that top-performing farms are generating £50,000 more, on average, than those in the bottom 25 per cent.

Top beef and sheep farms in less favourable areas (LFA) yielded an income of £45,200 a year compared with -£1,600 in the bottom 25 per cent. On lowland grazing systems, the difference between top and bottom was £55,100. The study states, ‘Almost all the determinants of success are down to the individual; the decisions made on the farm and how they are implemented.'

Brexit

Farmers Weekly sentiment tracker for April shows a continuing upturn in how farmers view their prospects (+3.18). There has been a slight improvement in commodity prices. Even though more see input prices rising faster than outputs, the gap is narrowing. There has been a slight improvement in how they think Brexit will affect their business. Overall producers remain more negative than positive about Brexit with half thinking it will be bad for their businesses, compared with 21 per cent who think it will be positive. Index (1.0 negative, 5.0 positive) has increased from 2.51 at the beginning of the year to 2.66.

It is difficult to get good data on how farmers voted in the referendum or what they think now. The Knight Frank rural sentiment survey (N just 200) shows they are deeply divided (as is the country). 26 per cent want a hard ‘no deal’ Brexit; 25 per cent want a second referendum leading to ‘remain’ (would it?); 22 per cent the EU/May deal; 16 per cent soft Brexit customs union;10 per cent other; 2 per cent, 2nd referendum leading to leave.

How are farmers preparing for Brexit? 51 per cent said they were making not making any preparations, which may not be irrational given the prevalent uncertainty. Top changes: Diversification; more land into conservation; make existing business more efficient; plant more trees; buy/sell land (the 'bigger is better' orthodoxy is being challenged, although there are still economies of scale).

As far as diversification is concerned, most low hanging fruit has been taken. It does require different business skills and capital costs can be high. Popular options include farm contracting; tourism; on farm niche food production (ice cream; yoghurt; cheese); farm shops; storage facilities or office space; leisure activities; eventually the farm can be just a context for the business.

We should not forget that the CAP has been a dysfunctional policy. It was not designed with UK agriculture in mind or contemporary problems. Basic payments have been only tenuously linked to outcomes. Policy instruments were poorly designed and often impact farm businesses without securing desired outcomes. It encouraged intensification of agriculture.

New policies in England

In England current land-based payments to farmers will be phased out over a seven-year period starting in 2021. They will be succeeded by public funding for public goods at the core of which will be the Environmental Land Management System (ELMS). Under the new system, farmers and land managers can enter into a contractual agreement with the government to produce environmental land management plans providing outcomes, for which they will be paid.

The National Audit Office has issued a highly critical report. Farmers will have little time to prepare for participation in a three year national pilot of ELMS, which will run from 2021 to 2024, because Defra is not planning to set out the environmental outcomes it will pay for or how much it will pay until April 2020. This is less than a year before the start of the pilot and when their payments will start to be reduced. Defra has consulted with farmers as it designs the Programme, but it has not provided the necessary guidance to enable farmers to plan how to adapt their businesses or how to work collaboratively with other farmers.

Defra has recently scaled back its ambitions for the level of take-up of ELMS during the first year of the three-year national pilot, from 5,000 farmers to 1,250, but is seeking to increase participation as the pilot progresses. It is not clear whether this lower number in the first year of the pilot will provide sufficiently robust evidence across the range of farm types and locations to inform further development of the Programme. This means that Defra only has two years to test how well ELMS will work at scale.

What the NAO is saying in coded language is that preparation is poor and it could blow up in Defra's face. Defra currently has no plans to test its assumptions about the level of take-up of the new system. If take-up is low, Defra will need to find alternative ways to achieve environmental benefits. Farmers that do not participate may leave farming or replace direct payment income by adopting more intensive farming methods that could damage the environment.

Trade effects

Under a no deal scenario, tariffs would apply to UK food exports (I do not think GATT 24 applies). Fresh lamb carcase and barley exports are likely to feel the largest impact given that the UK is a net exporter The sector facing the most challenges in a ‘no deal’ scenario is sheep meat. Tariffs under a ‘no deal’ Brexit would make exports uncompetitive, the sector is very reliant on exports to the EU.

There is concern about terms of trade agreements with third countries (the focus is often on the US, but there are problems elsewhere). Agriculture may be sacrificed for gains in other areas of the economy. There is concern about price competition from countries with lower standards, e.g., on animal welfare. But some countries are simply more price competitive.

The AHDB suggests that critical to doing things better on farms is to minimise overhead costs. Higher outputs account for 10-30 per cent of higher profits in top quartile farm businesses, but lower costs contribute 65-95 per cent. Farmers should set goals and budgets (business plan); benchmark; improve people management; be self-critical and use skills effectively.

It is difficult to say what the future holds. A no deal Brexit would be damaging. Perhaps Boris could deliver a compromise that he could get past the hard line Brexiteers, but the chances aren't good.

As far as the EU are concerned, the negotiated deal is one between the EU and the UK and it won’t be re-opened. Why would a different PM be able to persuade them otherwise? They will not abandon a small peripheral member state like Ireland. They don’t want to encourage others to exit.

A no deal Brexit is not in the EU’s interests, particularly Germany. There is scope for further negotiation on the political arrangements. It might be possible to offer a timetable on the backstop and alternative arrangements. The changing dynamics of the Franco-German relationship is the biggest uncertainty.

In questions, I was asked if I would advise sheep farmers to bail out now, given that production decisions need to be taken well in advance. My advice on balance was to hang in there.

I was asked how the attitude of banks and other finance providers might change. This is something I have researched in the past. The attraction of agriculture for lending is that it has been a stable sector with asset security. This will change to some extent after Brexit, but banks have considerable understanding of the sector and will be able to make informed decisions about future lending.

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